Three Stocks to Buy at Historical Highs
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We all like buying low and selling high, or even better, buying at record lows and selling at record highs. Unfortunately, anybody with some experience in the market knows that it´s just not possible to consistently time stocks with a high degree of precision.
The good news is you don´t need to buy at historical minimums to make a profitable investment, identifying high quality companies and regularly committing some money as long as the price is not excessive from a valuation point of view can be a very effective technique in the long term. If you have a long term investing horizon, maybe you should focus your attention to identifying the best stocks to buy instead of thinking too much about when to buy them.
Also, it is very important to keep in mind that the category of undervalued or overvalued stock makes reference to a company´s fundamentals in comparison to current market price. In many occasions transitory price falls can create buying opportunities, but it is not current versus past price levels what makes a stock cheap or expensive.
Apple (NASDAQ: AAPL) was trading below 90 USD at the beginning of 2009 and is now around 545 USD, needless to say, quite a spectacular run. There were many pullbacks that turned out to be great buying opportunities during the last years, but even investors who didn´t pay much attention to timing could have made some fabulous returns over time.
The key was to choose Apple, not a particular point in time to buy. Even now at all-time highs Apple is trading at a P/E of 15.5, which is very reasonable for such a high quality stock. If you like Apple, maybe it´s better to deploy some money over time instead of waiting too long for the perfect buying time and running the risk of missing a good opportunity.
Apple is quite an exceptional example in terms of how the company has rewarded investors over time, but other more stable companies with less spectacular growth can also be convenient long term investments despite their elevated current prices from a historical perspective. IBM (NYSE: IBM) is trading near historical highs at barely below 200 USD, but valuation for this very solid company is not excessive at all with a P/E of 15.2.
Warren Buffett has recently been acquiring shares of IBM and he has also been very explicit about the motives of his decision and the company´s merits. Off course Buffet wishes he had thought about IBM many years ago, but he likes the company now at current levels. Buffett is a true value investor, so he is not comparing IBM with previous prices; instead he is focusing on the company´s intrinsic value in comparison to its market price.
McDonald's (NYSE: MCD) is not precisely a high growth tech company, but can also be a useful example to illustrate the point. Shares of the fast food giant were at historical maximums of 85 USD by mid-2011. You could have waited for a pullback, but the stock didn’t loose much ground and has recently traded above 100 USD. Chances are that those who decided to wait too much regretted that decision later. Nowadays Mc Donald´s is trading at a P/E of 18.9, which is no bargain but quite a reasonable valuation.
A company is cheap or expensive in comparison to its fundamentals, not previous prices. This is a good point to remember when many high quality stocks are trading near their historical highs but still at moderate valuations.
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